Merger May Fill SDG&E;’s Energy Gap
When it comes to energy, San Diego Gas & Electric Co. Chairman and Chief Executive Tom Page is fond of saying, San Diego County sits smack in the middle of a desert.
Because the county has no coal, oil or natural gas reserves, SDG&E--which; Monday announced a planned merger with Tucson Electric Power Co.--has been forced to import every barrel of fuel oil and every cubic foot of natural gas it burns to produce electricity.
SDG&E;’s electrical generating plants, which burn natural gas or fuel oil, depending upon which is cheaper, produce 37% of the electricity the utility distributes to its residential, commercial and industrial customers. The nuclear-powered San Onofre plant generates an additional 25% of the power it distributes.
But, instead of building new electrical generating plants to meet the remaining demand, SDG&E; has been buying electricity from utilities with energy surpluses. Consequently, 38% of the electricity that SDG&E; distributes to its customers is carried into San Diego and southern Orange counties by high-voltage transmission lines.
SDG&E; on Monday initiated what Page described as a “bold and logical” move that could help the utility escape its energy desert: It announced a definitive agreement to merge with Tucson Electric, a utility that sits in the middle of a literal, but energy-rich, desert.
If the deal survives a complex string of regulatory reviews, SDG&E; and Tucson Electric will be merged into a company with $5.7 billion in assets. The proposed merger would create a “larger organization that’s better able to serve in a rapidly changing utility business,” Page said at a press conference Monday.
SDG&E;’s proposal signals the start of a trend that will sweep through the utility industry, he said.
On Monday, at least one utility industry analyst seemed to think Page is right.
Pressure in the West
“I think (the proposed merger) does put pressure on some companies out West,” said Edward Tirello Jr., a New York-based analyst with Shearson Lehman Brothers. “It might even make Southern California Edison and Nevada Power look like a viable merger because all of the transmission lines coming in from Utah go through Nevada.”
Tirello has been preaching utility industry consolidation for three years. According to Tirello, the more than 100 major U.S. utility companies will eventually be consolidated into fewer than 50. Tirello three years ago began predicting that SDG&E; would merge with or be acquired by another utility.
Tirello believes that the nation’s utilities would save billions of dollars through a wave of consolidations mirroring the merger wave that has restructured the airline, financial services and retail industries.
It is clear to Page that the rapidly changing utility industry environment will force utilities to abandon their historical role as power producers and follow in SDG&E;’s role as a “power broker.”
The industry is evolving into a “brokered business,” he said. “People will be moving power around, utilizing the resources they have more efficiently.
“It’s been our thesis that power supply and generation sources are very important but transmission is going to be the key to this business in the future,” Page said.
‘Instant Communication’
That new system will be remarkably efficient, according to Page, who compared the industry’s future to “a new telephone system that has instant communication with Zurich, Singapore or wherever, when all you had was a tin can and a taut rope.”
Page foresees Tucson Electric playing an important role in transforming SDG&E; into the energy broker he envisions.
In addition to coal-fired power plants that produce electricity for distribution to its 254,194 customers, the utility has access to 1,504 miles of high-voltage power lines that tie in with power plants in Arizona, Colorado, Utah and New Mexico.
SDG&E; already owns or has access to lines connecting power plants in California, Mexico, Arizona and the Pacific Northwest.
Those transmission lines would turn SDG&E; into “a great transmission company,” according to Page, who for years has been pouring capital into new transmission lines--not new generating plants.
UTILITY MERGER: FACT SHEET
San Diego G&E; Tucson Electric Electric customers 990,400 254,194 Growth in 1987 5.3% 3.7% Service territory 4,100 sq. miles 1,155 sq. miles Employees 4,612 1,069 Transmission lines 625 miles 1,504 miles Sales (kilowatt hours) 12.5 billion 6.4 billion Energy sources Coal 0 94% Natural gas/fuel oil 37% 4% Nuclear 25% 0 Purchased 38% 2% Total assets $3.6 billion $2.1 billion Electric revenue, 1987 $1.26 billion $472 million Gas revenue, 1987 $294 million 0 Net income, 1987 $197 million $135 million Share price, 1987 28 to 37 7/8 49 to 64 Shares outstanding 55.9 million 24.8 million Common shareholders 72,086 37,605
Source: Company reports
